Nasdaq Sell-Off: 2 AI Stocks to Consider Before Significant Growth

The Nasdaq Composite recently dropped by 5% from its peak as investors reacted to concerning economic news, including the lowest consumer sentiment levels seen in 15 months. Despite this downturn, some analysts on Wall Street are optimistic about substantial future gains, particularly for Arm Holdings and Axon Enterprise.

• Lee Simpson from Morgan Stanley has established a bullish target price of $300 per share for Arm, suggesting a potential 120% rise from its current price of $136.
• Meta Marshall, also at Morgan Stanley, has a target price of $1,150 per share for Axon, indicating a possible 135% increase from its current value of $488.

Here is what investors need to understand about these promising AI stocks.

Arm Holdings: 120% Growth Potential

Arm is primarily a semiconductor company that, until recently, focused on designing CPU architectures and licensing this technology to clients, rather than manufacturing chips themselves. They also provide software-development tools that assist programmers in creating applications for various markets, ranging from data centers to mobile devices.

Known for their power-efficient processors compared to Intel and AMD products, Arm processors are integrated into 99% of smartphones and 67% of other mobile devices. The company is increasing its presence in data centers as well thanks to recent enhancements in chip performance, with notable clients such as Alphabet, Amazon, Microsoft, and Oracle developing custom CPUs based on Arm technology.

In their latest quarterly results for fiscal 2025, which concluded in December 2024, Arm surpassed analyst expectations with a 19% revenue increase to $983 million, driven by a rise in royalty fees linked to shipped products utilizing Arm technology. The company also reported a 26% increase in non-GAAP net income to $0.39 per share.

During the earnings call, CEO Rene Haas highlighted Arm's strategic focus on the artificial intelligence market, stating, "We strongly believe that the advancements in AI, both for training and inference, will elevate the demand for computing power in the AI cloud. We expect Arm solutions to support needs across the cloud and edge environments." He also noted that Arm will provide CPUs for the Stargate Project, which seeks to invest up to $500 billion in AI infrastructure across the U.S.

Wall Street analysts forecast an annual increase in Arm's adjusted earnings of 32% through fiscal 2026, which ends in March 2026. While the current valuation of 96 times adjusted earnings may appear high, it is not unprecedented. Although achieving a 120% return in the next year may be challenging, investors could contemplate acquiring a small stake.

Axon Enterprise: 135% Growth Potential

Axon focuses on public safety solutions and is best known for its Taser-branded energy weapons. In addition to these, it offers a full suite of sensors and software designed for law enforcement and government organizations. Axon leads the market in not only conducted energy devices but also body cameras and digital evidence management solutions.

The company incorporates artificial intelligence across its offerings. For example, its digital evidence management system employs AI to transcribe and redact audio and video footage. The Axon Fleet cameras utilize AI to capture license plates from multiple vehicle lanes and immediately notify law enforcement upon identifying a match from a hotlist.

Last April, Axon unveiled Draft One, a generative AI tool that automates report writing using body camera footage. Remarkably, it achieved a $100 million revenue pipeline faster than any other product in the company's history. CEO Rick Smith stated, "We aim to position ourselves as the leading force in deploying AI through practical applications."

This past week, Keith Housum of Northcoast Research downgraded Axon's stock due to valuation concerns and its partnership split with Flock Safety, a prior collaborator in real-time crime technology. However, Meta Marshall of Morgan Stanley believes the market reaction was excessive. She argued, "Since Axon chose to end the partnership, it's likely they have found a solution for the real-time video technology needs."

Despite a 32% decline in Axon’s shares since the downgrade, this could represent a strong buying opportunity. Analysts predict that the company's adjusted earnings will grow at a rate of 22% per year through 2025. While the valuation of 99 times adjusted earnings remains high compared to expectations, Wall Street has historically underestimated Axon's performance.

Over the past six quarters, Axon has beaten consensus earnings estimates by an average of 34%. If this pattern continues, the current valuation could become more justifiable. While expecting a triple-digit return in the next year may be unrealistic, agile investors willing to embrace some market fluctuations might find it worthwhile to buy a small position.

Nasdaq, Investors, AI